B3-3.8-04, Rental Income from Non-Subject Property (09/02/2026)

The lender must document the following to use any rental income from the related property in qualifying:

• a current housing payment, unless the borrower has a minimum one-year of receiving rental income from the related property;¹
• the most recent individual federal income tax return (IRS Form 1040), including Schedules 1 and E, regardless of whether the non-subject property is listed on the tax return; and
• copies of the current lease agreement(s) if the property meets one of the qualifying examples to justify the use of a lease agreement.²

In addition, the lender must also confirm

• documentation to support the terms of the lease are in effect,² and the settlement statement or alternative documentation confirming the subject property's purchase or transfer of ownership date, or
• the repair expenses on Schedule E for the related property
  • reflect the costs for the renovation or rehabilitation, 
  • confirm the number of Fair Rental Days is less than 365, and
  • support the amount of time the related property was out of service.
• if rental income is reported on Form 8825, the most recent signed federal business tax return for a partnership or S corporation is required. This income must be reported as self-employment income.

Note: When ordinary income is also reported on Schedule K-1, along with IRS Form 8825 rental income, all documentation guidelines noted in B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed BorrowerB3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower  or B3-3.4-19, Schedule K-1 Income <25% OwnershipB3-3.4-19, Schedule K-1 Income <25% Ownership apply.

To determine adjusted net rental income (ANRI)

• If the related property is reported on Schedule E of the most recent individual federal income tax return (IRS Form 1040), and the related property meets one of the qualifying examples to justify the use of a lease agreement,² the lender must
  • calculate net rental income by performing a cash flow analysis using Schedule E, 
  • average the results over the number of months the property was in service,³ then
  • subtract PITIA of the related property.
• If the related property is listed on Schedule E of the most recent individual federal income tax return (IRS Form 1040) and the property does not meet one of the qualifying examples to justify the use of a lease agreement, the lender must
  • calculate net rental income by performing a cash flow analysis using Schedule E, 
  • average the results over 12 months,³ then
  • subtract PITIA of the related property.
• If the related property is not reported on Schedule E of the most recent individual federal income tax return (IRS Form 1040), the lender must
  • multiply the lease amount by 75% to obtain the net rental income amount,³ then
  • subtract PITIA of the related property.

When the borrower has 12 months or more of rental property management experience

• if ANRI is positive, the lender may use the full amount in qualifying.⁴
• if ANRI is negative, the lender must include the amount in the DTI ratio.⁴

When the borrower has less than 12 months of rental property management experience

• if ANRI is positive, the lender may use rental income to offset the PITIA only.⁴
• if ANRI is negative, the lender must include the amount in the DTI ratio.⁴

Note: Cashflow of the subject property equals the net amount on Schedule E plus any depreciation, interest, homeowners' association dues, taxes, or insurance expenses divided by the number of months as noted above. The lender may add back non-recurring property expenses, if documented accordingly.

If gross rents and related expenses are reported through a partnership or S corporation, the lender must evaluate any rental income (or loss) as self-employment income regardless of the borrower's percentage ownership interest or whether the borrower is personally obligated on the mortgage debt.

If the related property is reported on the most recent federal business tax return and it is evident that the business is responsible for payments, the lender may exclude the full PITIA from the DTI calculation when the related loan is current.

See also B3-3.7-01, Analyzing Partnership Returns for a Partnership or LLCB3-3.7-01, Analyzing Partnership Returns for a Partnership or LLC and B3-3.7-02, Analyzing Returns for an S CorporationB3-3.7-02, Analyzing Returns for an S Corporation.